Managing the accounts holds a great degree of importance for any firm irrespective of its size. It is vital for a firm to know its financial standing and also for dealing with taxation rules, financial obligations and various other aspects of running a business. While there are many different methodologies and aspects of accounting, the one very important accounting methodology is managerial accounting. It is the process of accumulation of data, measuring the same and reporting the information in the form of clear analysis. This information is known to be useful not only for the internal management but also for the various external stakeholders of the business or organization. Here the internal team of the company may include the Chairman, Directors, the CEO’s and the CFO’s, the division heads and others while the external stakeholders include any entity that has a direct or indirect financial interest in the said organization or company. For example, financial houses or banks that may have given out loans or mortgages to the company, investors and other such individuals or entities.
Managerial accounting and Cost accounting is one and the same thing. Though the terms are different, the implication is the same. This is primarily because both managerial accounting and cost accounting involve the process of maintaining records related to the past present and future operating costs of any company and converting the obtained data into useful information for the stakeholders.
The various principles of managerial accounting are useful for a number of reasons:
- Managing the performance and the growth of the business
- Reducing the operating costs and other expenses
- Determining the prices of goods and services
- Determining the cost of the supplies purchased
- Determining the costs of non-value added activities and programs
- Initiate or discontinue any practice, activity or program that may affect the profits of and the bottom-line of the business.
Another important piece of information that we can get from cost accounting is the estimate future cost figures. This helps preparing the budget for the future. Once this budget has been prepared, both the future cost estimates and the budget itself can be used as a reference for determining the actual performance of the firm. As such, the accounting principles are a crucial source of information for any business today. It not only helps achieving the core objectives of improving the efficiency of the firm, but also helps in consistent improvement in the overall output of the firm with respect to both the external and internal stakeholders.
The modern accounting principles originated during the era of the Industrial Revolution. It was during this time that the complexities of managing any business of a considerable size led to the development of these principles for tracking costs, recording expenses and thus help business managers and owners to make better decisions and improve profitability while simultaneously reducing expenses and possible losses.
Today, almost every business, small, medium or large, non-profit organizations and even governmental agencies and institutions make use of the various principles of cost accounting for determining their long-term and short-term goals. The information obtained with the help of cost accounting is complimented with financial accounting, marketing strategies and legal knowledge in order to make a complete business plan by business owners and other personnel involved in the decision making process.
An interesting fact here is that while managerial accounting and cost accounting are the same, financial accounting is something completely different. While the former is important for making the big decisions, the latter will help one determine the financial health of the organization. Decisions such as the location of the business, the overall profitability, the bottom line and others are determined with the help of financial accounting. Also, while managers and business owners themselves can do managerial accounting, financial accounting will require the help of professionals to be carried out effectively.